Free exchange

Border follies

Liberalising migration could deliver a huge boost to global output

IN BAD economic times the temptation to bash immigration is overwhelming. “Get the stench out of Greece,” runs a slogan of Golden Dawn, an increasingly popular anti-immigrant party there. David Cameron has pledged to more than halve annual net migration into Britain by 2015. In America Republicans are wondering how much anti-immigration rhetoric contributed to Mitt Romney’s defeat in the presidential election. A change of political tune is badly needed. Evidence suggests that increased flows of people across borders could ignite global growth.

The economic case for migration is similar to that for free trade. Trade benefits countries by letting workers specialise in activities in which they are relatively more productive, raising output. And the larger market created by trade spreads the fixed costs of innovation more thinly, encouraging the development of new goods and ideas. Governments began the long march towards trade liberalisation after grasping that its upsides outweigh its costs, leaving a surplus large enough to compensate the losers.

Immigration is an afterthought, in both practice and theory. In traditional trade models wages converge across trading partners with similar technologies even without migration, a phenomenon winningly branded “factor-price equalisation”. Sadly, factor-price equalisation is a real-world rarity. As of 2000, for instance, a worker in Mexico earned a wage 40% that of a Mexican-born worker of similar education and experience working in America.

Most of this wage gap is down to productivity differences, stemming from disparities in the quality of infrastructure, institutions and skills. An individual worker, however talented, cannot hope to replicate the fertile environment of a rich economy all on his own. But transplanting a worker into rich soil can supercharge his productivity. A Mexican worker earns more in the United States than in Mexico because he can produce more, thanks to the quality of US technology and institutions.

Millions may move from poor world to rich without bidding down wages in the rich country relative to the developing one. True, a rapid burst of immigration might temporarily reduce wages. But if the pace of movement is slow enough to allow investment to adjust, borders could open without any wage dislocation in either origin or destination economies. Migrants themselves would benefit handsomely, however. In a new paper* John Kennan of the University of Wisconsin-Madison estimates that opening borders could raise the average wage of workers from developing countries by $10,100 a year, or more than 100%, thanks to the large rise in the incomes of those opting to migrate.

Those bigger incomes should swell global GDP. In a recent report Sharun Mukand of the University of Warwick calculates the effect of movement by half of the developing world’s workforce to the rich world. Such a vast migration could never happen in practice, of course, but as a thought exercise it is instructive. If migration closes a quarter of the migrants’ productivity gap with the rich world, their average income would rise by $7,000. That would be enough to raise global output by 30%, or about $21 trillion. Other studies find even bigger effects. A 2007 paper by Paul Klein, now at Simon Fraser University, and Gustavo Ventura, now at Arizona State University, reckons that full labour mobility could raise global output by up to 122%. Such gains swamp the benefits of eliminating remaining barriers to trade, which amount to just 1.8-2.8% of GDP, reckons Mr Mukand.

Even a modest (and more practical) easing of restrictions could be very rewarding. Lant Pritchett of Harvard University estimates that just a 3% rise in the rich-world labour force through migration would yield annual benefits bigger than those from eliminating remaining trade barriers. The incorporation of women into the rich-world workforce provides an analogy: this expanded the labour supply and the scope for specialisation without displacing the “native” male workforce.

Rich-world residents nonetheless worry that migrants will gain at their expense. Yet in a survey of research on the topic Francine Blau and Lawrence Kahn of Cornell University find that few studies turn up a negative impact on native wages. In a recent paper on western Europe Francesco D’Amuri of the Italian central bank and Giovanni Peri of the University of California, Davis find that immigration encourages natives to take more complex work. Such “job upgrades” are responsible for a 0.6% increase in native wages for each doubling in immigrant labour-force share. Where immigration disadvantages subsets of the population, Gordon Hanson of the University of California, San Diego reckons that charging an entry fee to migrants or their employers could help pay for training or benefits for those who lose out.

A frosty welcome

Advanced economies may also fret for their budgets. In a survey of fiscal studies Sari Pekkala Kerr of Wellesley College and William Kerr of Harvard University find that immigrants may sometimes use social services more intensely than natives. Yet it is hard to argue that immigrants are a systematic drain on the public purse. Some newcomers contribute more in tax than they receive in services, offsetting much of the drag from those who are net recipients of public benefits.

Others worry that emigration by talented people may hurt the economies they leave behind. But the possibility of migration creates incentives for people in emerging markets to invest in education, including among those who opt to stay put. Immigration generates remittance flows back home; informal links facilitate cross-country trade and investment. If policymakers can see past their fear of the foreign, the dividends could be huge.

Sources

"Open borders", by John Kennan, NBER Working Paper #18307, August 2012

"International migration, politics and culture: the case for greater labour mobility", by Sharun Mukand, Chatham House Policy Paper, October 2012

"TFP differences and the aggregate effects of labor mobility in the long run", by Paul Klein and Gustavo Ventura, Berkeley Electronic Journal of Macroeconomics, 2007

"Let their people come: breaking the gridlock on global labor mobility", by Lant Pritchett, 2006

"Immigration and the distribution of incomes", by Francine Blau and Lawrence Kahn, NBER Working Paper #18515, November 2012

"Immigration, jobs and employment protection: evidence from Europe before and during the Great Recession", by Francesco D'Amuri and Giovanni Peri, NBER Working Paper #17139, June 2011

"The economics and policy of illegal immigration in the United States", by Gordon Hanson, Migration Policy Institute, 2009